Essar races against time to complete Rosneft deal

I-T dept non-committal on tax exemption

The Essar group is racing against time to close its blockbuster $13-billion deal to sell Essar Oil’s 98 per cent stake to Russian energy giant Rosneft before March 31 so as to receive capital gains tax bonanza from the local tax authorities. According to new provisions of the India-Mauritius tax treaty, all such transactions would be protected under the treaty only till the end of the current financial year.

Essar officials say they are still awaiting clearances from the lenders and other statutory bodies, and as all clearances are still not in, the deal has not closed as yet. The group hopes to receive all the clearances including those applied by Rosneft by the middle of next month.

According to Essar’s earlier estimates, if the deal closes before March 31, then it would be able to take advantage of the Indo-Mauritus tax treaty that was amended last year. The shares of Essar Oil are held by Mauritius-based entities and if these entities sell shares, its tax liability would be zero as per Mauritius laws. The new provisions under the treaty gives right to India to tax capital gains on investments from Mauritius from April 1, 2017. This provision exempts investments made until 31 March and hence the Essar group is hurrying to close the deal. It has received the Competition Commission of India’s nod for the transaction in December last year.

Essar officials are optimistic to receive all the approvals by next month and expect to get the benefit of the tax treaty. Media reports earlier said Essar had sought no-dues certificate from the Indian income tax department so as to make sure that the transaction will not be taxed at a later date, as it happened in the case of Vodafone. But Essar officials said no such application has been made to the income tax department.

Another hurdle for the deal has come from overseas lenders. In November, Essar Global’s lenders, including funds managed by Davidson Kempner Capital Management and several global financial institutions who are together owed approximately $411 million, issued a statement sought more details on the transaction so that they can protect their interests.  

The Essar group is keen to close the deal as it would wipe off half of its existing loans worth Rs 88,000 crore. Besides that, the holding firm Essar Global has debt of $4.5 billion (Rs 30,000 crore) in international markets. The group has already received a bridge loan from Russia’s VTB Bank that has been used by the group to pay off its foreign lenders including Standard Chartered Bank. Several other lenders also stand to gain from this deal including State Bank of India, ICICI Bank, Punjab National Bank, and IDBI Bank. After the transaction, the Ruias plan to focus to turnaround its steel and power business.